As the 301 Investigation Hearings Conclude, What Comes Next?

Authors: Laura Farhang and Julia Ellings.

The three-day hearings on proposed Section 301 tariffs on Chinese-origin goods have drawn to a close, and the witness testimony presented to the 301 Committee has provided a useful perspective on the potential benefits—and costs—such tariffs could pose to U.S. businesses and consumers. The hearings followed the Office of the U.S. Trade Representative’s (“USTR”) April 6, 2018 publication in the Federal Register of a proposed list of Chinese-origin products that could be subject to an additional 25 percent tariff as part of the Section 301 investigation into China. The list was developed by the interagency 301 Committee1 with the intention of targeting products benefitting from Chinese industrial policies, particularly the Made in China 2025 initiative, while minimizing disruption to the U.S. economy by avoiding those products most likely to impact U.S. consumers. The USTR has recommended that the tariff be applied to $50 billion worth of Chinese goods.

USTR Robert E. Lighthizer launched the investigation into China’s unfair practices, including technology transfers and intellectual property (“IP”) theft, on August 18, 2017. The investigation specifically focuses on “whether acts, policies, and practices of the Government of China related to technology transfer, intellectual property, and innovation are unreasonable or discriminatory and burden or restrict U.S. commerce.”

The witnesses included representatives from the steel, automotive parts, and electronics industries, as well as representatives from agricultural, chemical, and manufacturing associations. Almost all witnesses expressed concerns about China’s unfair trade practices and supported USTR’s initiative to provide U.S. businesses with relief and a more level playing field. Some businesses, such as U. S. Steel Corporation, noted that they have been direct victims of cyber-attacks and IP theft, while several others, such as Skyline Steel, recounted how their businesses suffer by China’s practice of reverse-engineering products. Chinese competitors, who are unburdened by the research and development and IP costs borne by U.S. manufacturers, are then able to undercut U.S. businesses by selling at lower prices in the U.S. market, as well as all other markets where U.S. and Chinese manufacturers compete. Other witnesses expressed frustration that their efforts to operate businesses in China are hampered by China’s opaque and restrictive laws that prohibit U.S. companies from forming companies in China outside of a joint venture with a Chinese business.

While all witnesses agree something must be done to address trade problems with China, there were a variety of opinions as to which industries should bear the cost of tariffs, and in some cases, whether tariffs are an appropriate response at all. Among the most common views expressed:

Small and medium-sized businesses appreciate the opportunity to be heard on trade issues. Whether in favor of or in opposition to the Section 301 remedy proposed, several small and medium-sized businesses expressed appreciation for the Administration’s efforts to solicit input from their companies. Opportunities to influence or otherwise weigh in on trade policy have been limited for companies without significant resources, and the Section 301 process has permitted a broader perspective to be considered.

The proposed 301 tariffs present challenges to manufacturers who have spent years building supply chains and negotiating sourcing agreements in China. Manufacturers and retailers expressed frustration that supply chains would be upended by the tariffs. A common refrain was that the proposed tariffs have not taken into account the challenges that major manufacturers face, many of whom have multi-year contracts with their suppliers, in attempting to move their manufacturing on such short notice. Many manufacturers — such as those for auto parts — face dual pressures because they must fulfill their own supply agreements with their customers. As a practical matter, moving production can take years, involving finding suitable plants with capacity, conducting due diligence, transferring licenses and IP, and conducting quality control, among other requirements. Many manufacturers told the Committee that they cannot possibly move production in time to avoid the tariffs, and that bearing the cost of the 25 percent tariff would jeopardize their domestic businesses and jobs in the United States.

The tariffs may further encourage production shifts to other countries in Asia outside of China. While many witnesses, particularly in the steel industry, testified regarding substantial unused capacity in the U.S. manufacturing sector, other witnesses argued that there were not sufficient U.S. alternatives to Chinese manufacturing facilities. For example, retailers argued that there are no U.S. television manufacturers, only assembly plants, and that it would be cost prohibitive to establish a manufacturing facility in the United States. However, companies seeking to source inexpensive televisions could work with suppliers willing to establish manufacturing facilities in other countries in Asia, where labor costs are lower and there is substantially more affordable capacity. Those opposed to tariffs argue that the net result would not benefit U.S. manufacturing and only achieve temporary disruptions in supply chains.

Tariffs are not the best way to address unfair trade practices by China. Many witnesses expressed skepticism that tariffs would lead China to alter its approach to the protection of intellectual property. Tariffs can be circumvented in numerous ways, whether by transshipment, sending products to other countries for further manufacturing, or shifting production to finished products that are not subject to 301 tariffs. Instead, some witnesses urged the Committee to consider alternative means to address the 301 report, such as bilateral negotiations, WTO settlements, and a heightened focus on cyber security.

The tariffs are appropriate and necessary, but are too heavily focused on components rather than finished goods. The proposed list of goods subject to tariffs includes many semi-finished goods used in U.S. manufacturing, rather than being exclusively focused on finished consumer goods. Manufacturers such as Pittsburgh Carbide Die Co. and Trinity Products urged the Committee to include finished products such as nail, rivets, and sheet piling to the list of goods subject to tariffs to avoid further disadvantaging U.S. manufacturing vis-à-vis their Chinese competitors.

Rather than focus on the smallest consumer impact, the tariffs should be applied on products that are having adverse impacts on U.S. producers in the U.S. market. Many witnesses asked the Committee to consider applying tariffs to additional products that they alleged are having harmful impacts on domestic producers in the U.S. market. These businesses and industry associations emphasized the opportunity presented to address unfair trade practices with the Section 301 tariffs.

While the 301 Committee will have much to consider following the hearing and following the submission of written rebuttal comments due on May 22, 2018, U.S. businesses and consumers are left with uncertainty regarding the outcome of the 301 investigation. It is likely that the final list of products subject to tariffs will change substantially as a result of concerns raised at the hearing and in public comments. Further, it is also possible that USTR will recommend increasing (or lowering) the value of Chinese goods to be covered by 301 tariffs. It is also possible that ongoing discussions between the Administration and China regarding the 301 investigation will yield favorable results and an additional tariff remedy may not come to fruition.

In the meantime, U.S. businesses and manufacturers must continue to operate their businesses, manage their supply chains, and plan for the future. U.S. businesses and importers should be alert to additional Federal Register notices on the 301 investigation, as it is possible that USTR will seek additional comments in the event the list of products subject to 301 tariffs is revised substantially. They should also confirm HTSUS classifications for the goods that they import so they can reliably determine whether they are in fact subject to any 301 tariffs that might take effect. Finally, in cases in which Chinese goods are shipped to a third country for further manufacturing, importers should expect guidance from USTR on the rules of origin to be applied to goods subject to 301 tariffs and should be prepared to evaluate origin.

1The 301 Committee was comprised of representatives from the USTR, the Department of Commerce, the Department of Labor, the Small Business Administration, Customs and Border Protection, and the Executive Office of the President’s Council of Economic Advisors.

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